If you consider yourself a long-term investor, the current downturn in the market will probably turn out to be a terrific long-term buying opportunity, provided you pick the right stocks. With many high-quality stocks still down well below their February highs, remember this Warren Buffett quote: "Time is the friend of the wonderful company, the enemy of the mediocre."
If there were any time to look at true "set it and forget it" stocks that allow you to sleep well at night, that time is now. What types of stocks are these? Companies with both the financial strength to power through the current crisis, and enough promising growth opportunities to propel them over the coming decades.
In that light, here are three stocks to buy today with a 50-year time horizon.
The current COVID-19 outbreak is highlighting the importance of Amazon.com (AMZN 1.20%) to society. With people staying home to avoid infection, they're ordering more and more goods from Amazon instead of heading out to physical stores. The surge in demand was so sudden that Amazon hired 175,000 new people in March and April, raised wages $2 per hour, and doubled overtime pay during the quarter.
The March increase in demand led to 29% sales growth last quarter, beating 17% a year ago. And with COVID-19 likely to remain a threat for the next year, at least until a vaccine is reached, buying from Amazon is likely to become even more of an ingrained habit for more and more people.
Amazon does much more than just deliver a wide variety of goods. It's also the leader in cloud computing, which enables corporations to outsource their IT infrastructure to Amazon's efficient, state-of-the-art data centers. Amazon Web Services (AWS) is the outright leader in the category. And despite offering free service to small businesses last quarter -- and already having an enormous $40 billion sales run-rate -- it managed to grow 33%. AWS operating margins also rose 400 basis points to more than 30%.
With the core e-commerce and cloud computing businesses, Amazon already has a compelling long-term growth story. In the U.S., e-commerce accounted for only 11% of total retail sales in 2019, up from 9.9% in 2018 and poised to gain even more share in the years ahead. Meanwhile, AWS' $40-billion-plus run rate is a small fraction of the total $3.7 trillion enterprise IT market across infrastructure, platform, and software, leaving a big potential market for AWS to grow into in the decades ahead.
But aside from these two growth stories, what will really drive Amazon for decades is its inventive, entrepreneurial culture. CEO Jeff Bezos refers to it as being a "Day One" company, meaning that Amazon's culture is to invent and experiment in the manner of a start-up, despite its massive size.
The company is already well on its way, making a few of these new business lines a reality, For instance, Amazon has now grown its digital advertising businesses from virtually nothing a few years ago to $14 billion in sales last year, while growing at 40% in 2019. Amazon has also invented its cashier-less and contact-less Amazon Go store concept, which it has begun licensing to other retailers.
Over the coming years, I'd expect that Amazon's inventive culture and its willingness to lose money will yield even more new businesses we don't even know of yet. Today's strong position and unique culture are why Amazon remains a stock to buy and hold for the next 50 years, even though it's done so well already in 2020.
While Amazon dominates the e-commerce space, Alphabet dominates online search to an even greater extent, with a market share approaching 90% globally. That makes Alphabet the go-to for highly effective digital ads.
Digital advertising as a whole is taking share from traditional advertising sources, and according to a Trefis estimate last year, digital advertising was expected to grow at a 16% average annual rate between 2019 and 2025. That growth profile hit a speed bump with the COVID-19 pandemic, but Alphabet just reported better-than-expected results last month that showed digital advertising to be relatively resilient in the trough of the pandemic.
The resilience was not only seen in search, but also in Alphabet's high-growth YouTube segment, which the company acquired for just $1.65 billion in 2006. To give perspective on how much Alphabet has grown YouTube, it made $4 billion in revenue last quarter alone.
So Alphabet has several dominant digital advertising businesses that, while experiencing headwinds this year, should resume their above-average growth over the next decade and beyond. But what could really propel Alphabet for the next 50 years are some of its newer business lines and moonshot ventures it's cultivated with its "other bets" platform.
The most important nonadvertising business for Alphabet is its burgeoning cloud division, which it hopes to build into a formidable challenger against AWS. So far, so good. While much smaller than AWS today, Google grew its cloud division faster, at 52% last quarter, with the underlying infrastructure-as-a-service platform growing faster than that.
Alphabet also owns the Android operating system for mobile phones, which generates fee revenue from the Google Play app store, which also surged amid stay-at-home orders. Investors should look forward to Google's app and hardware businesses growing in the years ahead as well.
Looking out beyond five or 10 years, Alphabet investors could experience another boom if any of its nascent "other bets" pay off. These include Waymo, Alphabet's self-driving car unit; Verily, its life-sciences technology division; Calico, focused on lengthening the human life span; Access, which brings high-speed internet to some American cities; Loon, which delivers internet to underserved areas of the world through balloons, as well as a host of other new ventures. Google also has two investment arms, including GV, which is focused on early stage start-ups, and Google Capital, which invests in more-mature growth companies.
With so many other irons in the fire besides search, Alphabet is a solid bet to survive and thrive for another half-century.
Although it's unknown to many American investors, South African investment firm Naspers (NPSNY 3.01%) is another stock that I think can do a lot of interesting things over the coming years and decades. Its primary asset is a 31% ownership stake in Tencent (TCEHY 3.24%), the Chinese internet giant with dominant positions in China's high-growth technology industry.
Tencent is a leader in online video games, pioneering the free-to-play mobile gaming revolution that has swept China over the past decade. Tencent's other crown jewel is WeChat, the Facebook of China (since Facebook is banned there). WeChat reported 1.2 billion users last quarter, continuing to grow users in the high single-digits, with revenue growing 47%, much faster than Facebook.
But Tencent's reach goes much, much further than just WeChat and video games. The company is one of a few leading video streaming platforms in China and has the largest music streaming platform with its majority ownership of Tencent Music Entertainment Group. The company is also one of two big leaders in electronic payments with its TenPay division, which also does wealth management and lending.
More recently, Tencent has grown into a viable cloud computing company. Late last year, its cloud division released Tencent Meeting, which has quickly become the leading videoconferencing app in China amid the pandemic.
Tencent's leadership in all of these high-growth markets enabled it to post some amazing results in the first quarter, with overall revenue up 25% and net profits up 29%.
But I'm suggesting buying Naspers, not Tencent. Why? Two reasons: One, Naspers doesn't own just a large stake in Tencent, but also many other global internet businesses across the globe in food delivery, payments, and online classifieds. Two, Naspers trades at a huge discount to just its stake in Tencent, let alone its other businesses outside of that!
Naspers has tried to close the valuation gap by spinning off its investments outside of South Africa, including Tencent, into a separate company called Prosus (PROSY 2.80%), which Naspers listed last year in Europe, a bigger exchange than South Africa. While Prosus' value did go up a bit relative to its stake in Tencent, it still trades at a sizable discount, and Naspers even trades at an additional discount to the value of its 72.5% stake in Prosus.
Still, Naspers' management is clearly trying to close the valuation gap through financial engineering, and there are additional steps it can take in the future. Over the next 50 years, I not only expect Tencent to do well, but I expect Naspers (and Prosus) to figure out a way to close the valuation gap between their stock prices and their asset value.
That may not happen overnight or even within a year or two, but over the very long term, Naspers gives investors a world-class tech company at roughly a 40% discount to the value of that asset, and likely a 50% discount to Naspers' total net asset value, when non-Tencent businesses are taken into account. That's why Naspers is such an intriguing play for the very, very long term, as I don't expect the discount to close quickly.